Title: REACTION OF DOMESTIC INVESTMENT DUE TO MOVEMENT OF REAL EXCHANGE RATE: STUDY OF BANGLADESH
Author:
Omar Faruk
Abstract:
This paper investigates how the private sector, along with the government, contributes to economic development in Bangladesh through production, investment, and exports. Specifically, it examines how private domestic investment responds to changes in the real exchange rate, exploring whether investment reacts differently to real depreciations compared to real appreciations. The study utilizes the Johansen Co-integration likelihood approach and VECM methodology to analyze the long-run relationship and detect short-run and long-run causality among variables (Domestic investment, Real Exchange rate, and real income) using annual data spanning from 1976 to 2015. The findings indicate that domestic investment is positively influenced by real income and the real exchange rate, both of which are statistically significant. According to the findings of the VECM analysis, domestic investment and real income converge to equilibrium around 12.5 years and 33.33 years, respectively. In contrast, the exchange rate appears to have already reached equilibrium. Moreover, there is evidence of long-run causality among the variables, with short-run causality running from real income to domestic investment, but no short-run causality from the exchange rate to domestic investment.
Keywords: Domestic investment, Exchange rate, Real income, Responses Johansen Co – integration, VECM.
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